This is the highest amount that Pakistan has ever raised in a single attempt. DESIGN: FAIZAN DAWOOD
It was the highest amount that Pakistan has ever raised in a single attempt, which according to analysts shows the increasing confidence of international investors in government policies.
The bonds were highly over-subscribed, receiving offers of $5.2 billion, but only offers totalling $2 billion were accepted, Ministry of Finance spokesperson Rana Assad Amin told The Express Tribune.
Amin added that against the initial expectations of $500 million, the investor response was overwhelmingly strong and the order-books were oversubscribed across the two tranches, consisting of over 400 orders from high quality investors.
Finance Minister Ishaq Dar speaking at the US Institute of Peace during his visit to Washington, commented on the Eurobond that the demonstration of massive response to Pakistani sovereign paper is unprecedented.
“The multilateral donors and international markets have reposed tremendous confidence in Pakistan’s economic future.”
The government has raised $1 billion for five years and another $1 billion for ten years, according to details issued by the Finance Ministry. However, the government will be paying a high cost for venturing into international debt market after a gap of seven years.
The $1 billion raised for the five-year tenure have a fixed rate of 7.25%, 5.58 % over and above the benchmark five-year US Treasury rate. The $1 billion were generated through ten-year bonds at a fixed rate of 8.25%, which is 5.56% above the corresponding 10-year US Treasury benchmark rate.
In 2007, the Musharraf government had issued ten-year bonds at 6.75% interest rate, which was 3.25% above the US treasury rates at that time.
Against the high premium that Islamabad chose to pay, Sri Lanka on Tuesday sold $500 million of five-year bonds at 5.1%. Pakistan has a junk credit rating of Caa-1 by Moody’s Investors Service, which increased cost of borrowings.
Under the $6.8 billion bailout package, the IMF has asked Pakistan to increase its gross official reserves to $9.4 billion by end of June this year. As of end March, the gross official reserves stood at $5.17 billion, requiring the government to raise another $4.3 billion in three months. After the successful issuance of Eurobonds, the government is betting on the World Bank and the Asian Development Bank to meet the remaining shortfall.
According to the Ministry of Finance, the five-year bonds were distributed across all major geographic regions with 59% going to US investors, 19% to UK investors, 10% to investors in mainland Europe, 10% to investors in Asia and 2% to investors elsewhere. Fund managers took 84% of the five year issue, banks took 8%, hedge funds took 7%, and insurance companies and pension funds got 1%.
The Finance Ministry said that the ten-year bonds were distributed 61% to US investors, 21% to UK investors, 12% to investors in mainland Europe, 5% to investors in Asia and the Middle East and 1% to investors in other regions. Fund managers took 86% of the ten-year issue, hedge funds took 9%, banks took 4%, and insurance companies and pension funds took 1%.
Two Pakistani teams had held the road shows. A team headed by the Finance Minister Ishaq Dar visited Dubai, London and New York and another team headed by the Finance Secretary Dr Waqar Masood visited Singapore, Hong Kong, Los Angeles, San Francisco and Boston.
Disclaimer
The bonds have not been and will not be registered under the United States Securities Act of 1933, or with any securities regulatory authority of any state or other jurisdiction of the United States. They may not be offered or sold in the United States unless they are registered under the Securities Act, or are offered and sold pursuant to an exemption from the registration requirements of the Securities Act.
The investment instruments are being offered and sold outside the United States, and inside the United States only to qualified institutional buyer within section 144a of the Securities Act.
The securities have not been approved or disapproved by the US Securities and Exchange Commission, any state securities commission or any other regulatory authority in the United States.
COMMENTS (22)
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Extremely unfair of ET not to publish my previous comment since it was against the Eurobond issue and maybe ET is supportive of Mr. Ishaq Dollar's Eurobond fiasco. What a pity ET.
@Mehdi Mudassir: ET, you should moderate this character. How can you allow anyone to incite going against the constitution???!??
The problem with many pseudo-intellectuals is that they have to write hate comments even if they don't know the subject. Those comparing it with US$ 500 Million raised during Musharraf's era should know the main difference that the amount was raised through issuance of Sukuks by mortgaging the Motorway M2 (Mush didn't add to the Motorway network built by Nawaz Sharif but used it to secure loans). The credits backed by separable fixed assets and generating independent cashflows always carry a lower risk premium! Pakistan is now in the MSCI Frontier Markets Index. It means that Pakistan, earlier known as a war-zone country in the international investor's community, is now on the radar screens of a large number of analysts and portfolio fund managers. It will help the government in offloading GDRs (against PSEs) in the international stock exchanges. This in turn will add to the reserves of Pakistan and will be a source of further interest from the international investors and industrial conglomerates.
@asim:
Would be you be so kind enough to put some reasonable argument that why is it not a right decision.
Has anyone stopped to consider that the $1 billion loan @ 7.25% compounded annually leads to $84 million interest alone per year, not counting the principal to be paid back and the $1 billion loan @ 8.25 % compounded annually leads to a $121 million interest per year; again, not counting the principal to be paid back? That adds a debt burden of $205 million annually for 5 years and then $121 for the remaining 5! Moreover of the balance 4.3 billion required in three months, there will be a need of more loans from 'multilateral and bilateral sources.' Let us hope they are Shariah compliant interest free loans from brotherly countries or just free gifts with its concommitant obligations. And more importantly, I pray that the government puts the money to exceptionally good use instead of cooking the account books with a new recipe for disaster.
"The $1 billion raised for the five-year tenure have a fixed rate of 7.25%, 5.58 % over and above the benchmark five-year US Treasury rate. The $1 billion were generated through ten-year bonds at a fixed rate of 8.25%, which is 5.56% above the corresponding 10-year US Treasury benchmark rate. In 2007, the Musharraf government had issued ten-year bonds at 6.75% interest rate, which was 3.25% above the US treasury rates at that time."
So demanding a of premium of 5.56% compared to a premium of 3.25% is the sign of investor confidence.
Investors are hungry for yeild and not because of Mr. Dar's stellar performance. I am not sure what vision a tried and tested accountant can have other than balancing the books by leveraging. NS can do better by replacing some of these by-gone relics of the past with new faces but then probably thats what his all cainet is, past ghosts and relatives.
It is a sign of confidence. Musharraf also did that with probably much higher rate. . This is much better than taking money from the US (or others) with strings attached.
We all know where the $2 billion are going to. NZ and his Kashmiri clan's pockets. None of this would ever reach the masses. Even a treacle. I hope the Army takes over soon again
@Jibran: "My question is who will pay 10% interest rate, which is compound by the way." Bond interest cannot technically be compounded since even a delay in the payment of a single coupon triggers a default event. That's exactly why it is called a Fixed Income security. The compounded discount factor (or yield) is used only to price the bond according to its existing opportunity cost also called discounting
"You can offer 100% interest rate and generate even more funds. Problem is if it would precipitate your default?"
Its called an IRR, debt being raised for project financing is weighed against the expected returns of the project. And secondly one (all an individual, a corporate and a sovereign) can't raise as much amount as one wants by increasing the interest rate merely.
In international market these high yield bonds are called junk bonds for the risk of default and for a reason . You would have also known then that nobody oversubscribes the junk bonds. Sovereign high yields are technically more safe than corporate high yields.
In this highly volatile geo-political situation it is not a good decision.
@Jibran: who will pay the interest, the answer is well known to the investors so u need not to worry. secondly before calling them junk bonds at least check the rating given by rating agencies.
Interest rate is too high, Ishaq Dollar made a stupid decision. Instead he should have borrowed from Saudis.
To those on the high interest rate band wagon, Srilanka a much better economy than us which can attract better investors at lower interest
"Sri Lanka's previous five-year issuances in 2007, 2009 and January 2014 were priced at yields of 8.25 percent, 7.40 percent and 6.00 percent respectively."
Are all of et readers are as smart as the above two gentlemen or will someone with an economics degree also comment. Debt is raised based on the rating. We are rated lower than Sri Lanka, hence the higher pricing. The pricing of Pak debt has actually fallen 2-3% over past one year. So please, stop venting your frustrations for the world to see.
Instead of going after the elite to collect taxes the govt. continues to borrow more.
You got robbed with high rate you will have to pay and you are doing a victory lap? It's not confidence in your policies its knowledge that people may die of famine yet the feudals will make sure pakistan makes the debt payment so that the borrow and waste culture persists. Even a tiny country like S Lanka pays less interest. This is nothing to be proud of.
My question is who will pay 10% interest rate, which is compound by the way. You can offer 100% interest rate and generate even more funds. Problem is if it would precipitate your default? In international market these high yield bonds are called junk bonds for the risk of default and for a reason. Mr. I$haq Dar can continue to thump his back for this "achievement".
This is nothing to be happy about. The interest rate is too high and Pakistan will find itself unable to pay back the principal when the bonds mature. The high interest payment, in the mean time, will drain and shrink funds for possible economic development. The real solution for Pakistan is to cut the size of all its spending and live within its means. That means, it should end its geopolitical games and stop punching above its weight class.
The sincere and dedicated hard efforts of PMLN Government are bearing good fruit for Pakistan. Some pseudo-intellectual haters will continue to rot in jealousy but Pakistan will flourish InshaAllah. Long Live Pakistan!
Why would 50% US investors invest in Pak bonds? Is this a conspiracy?